UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF l933
Release No. 7669 / April 21, 1999
SECURITIES EXCHANGE ACT OF l934
Release No. 41316 / April 21, 1999
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1128 / April 21, 1999
ADMINISTRATIVE PROCEEDING
File No. 3-9879
:
In the Matter of : ORDER INSTITUTING PUBLIC
: PROCEEDINGS PURSUANT
: TO SECTION 8A OF THE
: SECURITIES ACT OF 1933
JEFF BERGMAN, : AND SECTION 21C OF THE
: SECURITIES EXCHANGE ACT
: OF 1934, MAKING FINDINGS
: AND IMPOSING A CEASE-
: AND-DESIST ORDER
Respondent. :
:
I.
The Securities and Exchange Commission ("Commission")
deems it appropriate to institute public administrative
proceedings against Jeff Bergman ("Bergman" or "Respondent")
pursuant to Section 8A of the Securities Act of 1933
("Securities Act") and Section 21C of the Securities
Exchange Act of 1934 ("Exchange Act".)
In anticipation of the institution of these
administrative proceedings, Bergman has submitted an Offer
of Settlement ("Offer") to the Commission, which the
Commission has determined to accept. Solely for the purpose
of these proceedings and any other proceedings brought by or
on behalf of the Commission or in which the Commission is a
party, and without admitting or denying the findings, except
as to the Commission's finding of jurisdiction over him and
the subject matter of this proceeding, which are admitted,
Bergman has consented to the issuance of this Order
Instituting Proceedings Pursuant to Section 8A of the
Securities Act of 1933 and Section 21C of the Securities
Exchange Act of 1934, Making Findings and Imposing a Cease-
and-Desist Order ("Order".)
Accordingly, IT IS ORDERED that proceedings
pursuant to Section 8A of the Securities Act and Section 21C
of the Exchange Act be, and hereby are, instituted.
II.
FACTS
The Commission finds:
. SUMMARY
From June 1993, to at least mid-1995, certain
executives at Northstar Health Services, Inc. ("Northstar"
or "the Company"), including its former chief executive
officer, engaged in a fraudulent scheme to inflate the
revenues of Northstar. Bergman participated in the fraud
involving the falsification of Northstar’s financial
statements for its fiscal year ended December 31, 1994
("fiscal 1994") by providing Northstar with false checks and
a false audit confirmation to support Northstar’s recording
of fictitious consulting fees earned by a Northstar
subsidiary from Breaux Corporation ("Breaux".) In turn,
these false documents were provided to Northstar auditors.
Contrary to Bergman’s representations, however, Northstar
never rendered any consulting services to Breaux, and Breaux
never owed the amounts to the Company. In fact, Breaux was
actually a corporation Bergman used to direct investments.
Bergman’s fraudulent conduct enabled Northstar to overstate
its revenue by $167,750 for fiscal 1994. As a result,
Northstar’s financial statements for fiscal 1994 were
materially misstated. These material misstatements were
included in Northstar’s Form 10-KSB filed with the
Commission for fiscal 1994, and in Northstar’s Registration
Statement on Form SB-2 that went effective on May 18, 1995.
. RESPONDENT
Jeff Bergman ("Bergman"), age 44, is a resident of
Wexford, Pennsylvania. From 1991 through at least 1995,
Bergman served as chairman of the board, chief executive
officer and president of a publicly-held company whose
securities were registered with the Commission pursuant to
Section 12(g) of the Exchange Act and traded on NASDAQ.
Bergman is also the friend of the former chief executive
officer, president and chairman of the board of Northstar.
C. OTHER RELEVANT ENTITY
Northstar Health Services, Inc. ("Northstar") is a
Delaware corporation with its principal place of business
located in Indiana, Pennsylvania. Northstar provides
rehabilitation therapy and related services at outpatient
clinics and patient care facilities in Pennsylvania, Ohio
and West Virginia. As of May 5, 1998, Northstar had
5,975,424 shares of common stock issued and outstanding.
Northstar’s common stock is registered with the Commission
pursuant to Section 12(g) of the Exchange Act and is traded
on the OTC Bulletin Board.
D. BERGMAN PROVIDED A FALSE AUDIT CONFIRMATION LETTER
AND TWO FICTITIOUS CHECKS FOR REVIEW BY
NORTHSTAR’S AUDITORS
For fiscal 1994, Northstar reported total net revenue
of $13,362,000 and income before taxes of $1,297,000. Of
the income before taxes, $167,750 (12.9 percent) resulted
from fictitious consulting revenue that Bergman, along with
the former chief executive officer of Northstar, falsely
claimed was owed by Bergman’s company, Breaux, to Northstar,
thereby resulting in Northstar’s false reporting of revenue
on three separate occasions. The first fictitious
transaction involved a $47,500 obligation owed by Breaux for
professional services rendered by Northstar in connection
with the "[o]rganization, development and staffing of Moon
Clinic." The consulting revenue was evidenced by an undated
invoice addressed to Bergman’s residential address. On two
subsequent occasions, Bergman, along with the former chief
executive officer of Northstar, facilitated Northstar’s
reporting of an additional $64,000 and $56,250 in fictitious
revenue for fiscal year 1994 for consulting services
Northstar purportedly provided to Breaux.
To support the fictitious revenue, Bergman provided
Northstar with false documents, and Northstar, in turn,
provided these false documents to its auditors.
Specifically, by letter dated March 17, 1995, Northstar sent
an audit confirmation letter to Breaux, signed by the former
chief executive officer of Northstar, asking Breaux to
confirm that as of December 31, 1994, Breaux owed Northstar
consulting fees of $167,750, the total due under all three
consulting arrangements. In response, Bergman falsely
confirmed that as of December 31, 1994, Breaux owed the
amount to Northstar and that Northstar had "subsequently
received" payment of $130,250 from Breaux. To make it
appear that the payments had been made, Bergman provided
Northstar with two checks totaling $120,250 written on a
Breaux bank account. However, during the period Bergman
wrote the checks and confirmed the amounts as owed, Breaux
had less than $600 in its bank account. The Breaux checks
were never cashed.
III.
LEGAL DISCUSSION
. VIOLATIONS OF THE ANTIFRAUD PROVISIONS -- SECTION 17(a)
OF THE SECURITIES ACT AND SECTION 10(b) OF
THE EXCHANGE ACT AND RULE 10b-5 THEREUNDER
Section 10(b) of the Exchange Act and Rule 10b-5
thereunder prohibit false and misleading statements made "in
connection with the purchase or sale of securities."
Section 17(a) of the Securities Act prohibits fraudulent
conduct "in the offer or sale of securities." Section
17(a)(1) of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder require a showing of
scienter. Aaron v. SEC, 446 U.S. 680, 695, 697 (1980). The
scienter requirement is satisfied by a showing of
recklessness. In re Westinghouse Securities Litigation, 90
F.3d 696 (3d Cir. 1996). Sections 17(a)(2) and 17(a)(3) of
the Securities Act do not require a showing of scienter.
Aaron v. SEC, 446 U.S. at 697.
A violation of Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
require proof that the misrepresentations or omitted facts
were material. An omitted fact is material if there is a
substantial likelihood that its disclosure would have been
considered significant by a reasonable investor. Basic Inc.
v. Levinson, 485 U.S. 224, 231-232 (1988); and TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976).
Bergman, a friend of the former chief executive officer
of Northstar, wrote false checks to make it appear that
Breaux had paid Northstar for fabricated consulting
services. Bergman signed a false audit confirmation letter
to facilitate the recording of $167,750 in fraudulent
revenue by Northstar. Bergman knew or was reckless in not
knowing that Northstar auditors would use the false
documents in auditing Northstar’s 1994 financial statements
and that the financial statements would be publicly
disseminated to Northstar investors. As the Commission has
recognized, "the confirmation procedure is an integral and
vital part of the auditing process. Subversion of the
process corrupts the integrity of the audit and can injure
investors by facilitating the injection of false financial
information into the marketplace." In the Matter of Troy
Lee Wood, Exchange Act Release No. 37905 (October 31, 1996).
Therefore, Bergman committed violations of Section 17(a) of
the Securities Act and Sections 10(b) and of the Exchange
Act and Rule 10b-5 thereunder.
IV.
FINDINGS
Based on the foregoing, the Commission finds:
That Bergman committed or caused violations of Section
17(a) of the Securities Act and Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder.
V.
OFFER OF SETTLEMENT
Bergman has submitted an Offer in which, without
admitting or denying the findings, except as to the
Commission's finding of jurisdiction over him and the
subject matter of this proceeding, which are admitted, he
consents to the Commission's issuance of this Order which:
Makes findings, as set forth above, and orders that he
cease and desist from committing or causing any violation,
and committing or causing any future violation of Section
17(a) of the Securities Act and Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder.
VI.
ORDER
Based on the foregoing, the Commission finds it
appropriate to accept the Offer submitted by Bergman and to
impose the Cease-and-Desist Order consented to therein.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section
8A of the Securities Act and Section 21C of the Exchange Act
that:
Bergman cease and desist from committing or causing any
violation and any future violation of Section 17(a) of the
Securities Act and Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder.
By the Commission.
Jonathan G. Katz
Secretary
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